“Credit costs will decline because banks have already sufficiently boosted provisions in 2020, ” the ratings agency said in a report.
“Net interest margins will increase gradually as ample liquidity allows banks to reprice term deposits at lower rates while unwinding modification losses they incurred in 2020, ” it added.
Last year, banks’ earnings were dented due to higher loan loss provisions and slower loan growth across the business and household segments, as a result of the interruption caused by the Covid-19 pandemic.
Malayan Banking Bhd (Maybank), the country’s largest lender by assets, posted a 20.9% year-on-year (y-o-y) decline in net profit for the financial year ended Dec 31,2020.
Meanwhile, Public Bank Bhd’s earnings fell by 11.6% y-o-y in the same financial period.
However, it is noteworthy that all listed banks have continued to be profitable, supported by their robust loss-absorption buffers.
Looking ahead into 2021, Moody’s expects the Malaysian banking sector’s outlook to improve, citing improving macroeconomic conditions and receding asset risks.
Hence, the ratings agency has revised the sector’s outlook back to “stable”, after almost a year since it downgraded Malaysian banks’ outlook to “negative” in April 2020.
Other than the Malaysian banking sector, Moody’s has upgraded its outlook to “stable” for six other banking systems in the Asia-Pacific namely Australia, China, Hong Kong, Indonesia, South Korea and Singapore.
The ratings agency said banks in Malaysia are benefiting from an improving operating environment, considering that the national economy is expected to return to positive growth in 2021.
“Malaysia’s real gross domestic product will expand 6.2% in 2021, after contracting 5.6% in 2020, supported by the government’s fiscal spending and a recovery in global demand that will provide a boost to the country’s net exports, ” it said.
In addition, Moody’s believes that prudent underwriting, together with strong capital and liquidity, will shield banks in the country from any incremental financial stress caused by the coronavirus pandemic.
“Stable profitability, conservative loan growth targets and prudent dividend policies will enable banks to maintain their capital ratios at current high levels.
“The banking system’s Common Equity Tier 1 ratio stood at 14.8% at the end of 2020, a sufficient buffer against unexpected risks, ” it added.
Moody’s pointed out that banks’ non-performing loans (NPLs) will increase when forbearance or loan moratorium and other support measures for borrowers come to an end.
“However, proactive increases in loan-loss provisioning in 2020 will enable banks to absorb anticipated new loan losses, ” it said.
The ratings agency also opined that the domestic banking system’s funding and liquidity would remain sound.
It noted that banks are largely deposit-funded and not reliant on market-sensitive borrowings for funding.
“Deposit growth will keep pace with loan growth.
“Banks will continue to hold sufficient liquidity against any unexpected shock, with the liquidity coverage ratio for the banking system at 148% as of the end of 2020, well above the regulatory minimum, ” it said.
While the domestic banking system is backed by robust balance sheets and a supportive operating environment, Moody’s believes chances are high for the government to step in to provide support, in the event a bank defaults or struggles to sustain.
This is based on the government’s history of providing support to failing banks in the past, it said.
However, Moody’s pointed out that the government is unlikely to adopt a bail-in regime in the next 12 to 18 months.
Moody’s analysis of the domestic banking system comprises eight conventional commercial banks, one Islamic bank, one investment bank and one development financial institution.
“The rated entities accounted for about 79% of system loans as of the end of 2020, ” it said in the report.
The eight commercial banks are Maybank, CIMB Bank Bhd, Public Bank, RHB Bank Bhd, Hong Leong Bank Bhd, AmBank (M) Bhd, HSBC Bank Malaysia Bhd and Standard Chartered Bank Malaysia Bhd.
The other banks are CIMB Islamic Bank Bhd, Exim Bank Malaysia and CIMB Investment Bank Bhd.